Saudis, Sanctions, and Supplies
Over the past several days, information has arisen undermining a White House claim on Saudi policy.
Starting with Trump tweets and echoed by statements from administration economic spokespeople, the claim postulates that President Trump had requested an increase in crude oil production from Riyadh.
According to the claim, impending sanctions against Iran (a matter I have addressed at some length here in ECRG) are expected to reduce crude oil volume in the global market where declines in output from the likes of Venezuela, Nigeria, Libya, and, for at least the next several months, Canada.
Analysts had assumed that rising U.S. extractions would offset some of the broader declines. But that may well be tempered by two considerations.
Shale We Go On?
First, with current WTI (West Texas Intermediate) prices improving to $74 barrel and Brent hovering about $78, U.S. operators don’t have to produce at a maximum to be profitable. It makes more sense to leave extractable reserves in the ground and improve share prices.
Second, the greater effect upon global prices occasioned by a rise in U.S. production involves how that production affects the volume in foreign markets where prices are determined these days and are higher.
That means exports.
U.S. producers are now posting record trading volume, for the first time exceeding 3 million barrels a day.
Yet, there are clear indicators pointing to the lack of spare port, infrastructure, and even tanker capacity to move significantly beyond that level.
Against this backdrop, the Trump Administration has recognized that restricting Iranian oil from the market will act as additional upward pressure on oil prices, and a corresponding increase in end-user oil product prices.
Make no mistake, all politicians recognize that gasoline votes. The higher the price, the worse it is for incumbents.
How warranted is the concern?
Well, the observations I made in the last edition of ECRG Intel remain quite valid.
About That Iranian Snafu…
Iran had been steadily increasing its oil exports, rising to 2.7 million barrels a day by May. Thereafter, however, the JCPOA crisis had prompted a pullback of about 500,000 barrels a day this month.
My latest estimates view the net impact of a full renewal of U.S. sanctions as costing at least 700,000 more barrels a day.
Extending the sanctions regimen to other foreign participants through the zero balance approach would paralyze Iran.
At the height of the last U.S., EU, and UN combined sanctions, Iranian crude exports had collapsed to less than 1.4 million barrels a day.
I have confirmation from DC sources that the Department of Energy (DOE) has internally floated a very preliminary impact statement painting the environment three months out, assuming that the situation in Venezuela continues to deteriorate and volume from Libya continue to contract.
In the absence of additional genuine availability in the international market, that “back of the envelope” calculation anticipates a further 12% to 15% spike in U.S. market gasoline prices, with corresponding rises in low-sulfur diesel and heating oil.
Remember, U.S. refiners already lead the world in the export of finished oil products.
Rising domestic prices would reflect (probably more quickly increasing) prices abroad. That would put major exporting refiners such as Valero Energy Corp. (VLO) in a more profitable swing position.
However, an administration would hardly prefer for this to happen one month and change before what is shaping up as a heated partisan off-year election.
Therefore, the claim leak has the Trump administration lobbying the Saudis to increase production in a concrete move to limit oil product price increases.
There is just one thing wrong with such a scenario.
A Mexican Standoff in Vienna
All of my Saudi contacts deny it had anything to do with decisions made.
One colleague in the Saudi Energy Ministry (i.e., the Ministry of Energy, Industry and Mineral Resources) declared flatly that this amounted to “yet another example of Mr. Trump taking credit for something he had nothing to do with creating.”
For the record, Saudi Arabia and Russia (the main non-OPEC party in the production cap agreement), orchestrated a rise in production at the recently concluded OPEC session in Vienna.
However, the actual amount of additional volume allowed has not been released. Most of my contacts believe it to be around 1 million barrels a day, with that figure to be revisited in six weeks.
In short, the additional volume is not expected to match completely the anticipated loss in production from Venezuela alone.
One knowledgeable global trader put it to me this way: “[The Saudis and Russians] saw that there was space for increasing production without damaging either demand or overall pricing levels. OPEC Members having spare capacity will be pumping more without worrying about the consequence to pricing spreads. Vienna [the recently concluded OPEC meeting] simply provided an imprimatur for what was going to happen anyway.”
That dynamic, however, would have played out without any White House involvement and it rolled out quite independent of any pressure from Washington.
Some Saudi and Emirati policymakers are likewise quite livid about the latest example of U.S. politicians taking credit at their expense.
With the move toward sanctioning Iran making matters more tense on one side of the Persian Gulf, the U.S. is managing to shoot itself in the foot by teeing off erstwhile allies on the other side.
I am likely to have more to say on the unfolding sanctions drama shortly.
I am currently traveling to meetings in Switzerland on the matter.